With Election Over, Washington Moves On To 'Fiscal Cliff'

With the election settled, Washington, Wall Street and much of the rest world, it seems, are focused on whether Congress and a reelected president can avoid the fiscal cliff. To tell us what's at stake, we turn now to David Wessel. He's the economics editor of The Wall Street Journal and author of "Red Ink," a new primer on the federal budget and the deficit.

And, David, you know the noise about the fiscal cliff began the day of the election and it's getting louder and louder. It's not going to stop. Remind us though once more what the fiscal cliff is.

DAVID WESSEL: Well, unless Congress and President Obama agree to something different, the law - a law that Congress passed and the president signed - requires that spending be cut of across the board, indiscriminately, in all sorts of deficit and domestic programs, and that income and payroll taxes go up for nearly everyone who pays them.

Altogether, the government would withdraw from the economy about $450 billion in the current fiscal year. Now, that would mean turning off the lights and sending all of the government workers home or anything. But the Congressional Budget Office, which keeps track of these things, says that the spending cuts are so deep, the tax increases so sharp, that they'd probably push the U.S. back into recession in the beginning of 2013.

MONTAGNE: So obviously going over the fiscal cliff is something the president and Congress would want to avoid, right?

WESSEL: Yes, I mean nearly all the people in Congress, the leadership, and certainly the president, say they want to avoid going over the fiscal cliff. There are a few who seem to me to be posturing to strengthen their hand at the bargaining position - at the bargaining table by acting tough.

The big gap at the moment is this, President Obama and his allies in Congress say we won the election; we campaigned on raising tax rates for people over $250,000 a year, and so that has to be part of any agreement. The president wants to extend the Bush tax cuts for everyone else, but let taxes go up for the top two percent.

And Republicans like Mitch McConnell, the Republican leader in the Senate, and John Boehner, the Republican leader in the House, are saying, well, that's very nice but we're still here and we count, and we're still against raising those tax rates - especially, they often say, for small businesses.

MONTAGNE: Well, everyone sounded very conciliatory, I mean, in the hours after the election results came in. Now it sounds like we're right back where we were before the election.

WESSEL: No, I don't think we are there yet. Both President Obama and House Speaker John Boehner are being conciliatory. I think they want to be sure that everyone thinks of them as being the reasonable party, going into what's likely to be several weeks of negotiations. If the talks fail, if we go over the cliff, the president wants to say I did everything I could. And the Republicans in Congress want to say the same thing.

Neither of them wants to make the concessions in public, though, before the talks actually start. But Republicans are - at least some of the important ones - do seem to be saying we understand that taxes are going to go up, and probably go up on rich people. But we'd like to do it by closing loopholes, getting rid of tax deductions and credits and exclusions, rather than actually raising the explicit tax rate. But basically we are in the warm-ups here. The game hasn't really begun.

MONTAGNE: Alright, so then what happens next?

WESSEL: Well, last year the president has these secret talks with John Boehner which failed to reduce the deficit compromise, and ended with a lot of finger-pointing and a lot of hard feelings from congressional leaders of both parties who hadn't been involved. So this year's drama involves all the same players, despite the election, and each player is trying to avoid making the exact same mistakes they made last year.

Mr. Boehner, reportedly, is explaining the political realities to his caucus, reminding them, in case they hadn't noticed, that Barack Obama was reelected, Mitt Romney didn't win. And in contrast to last year's very hush-hush talks, Mr. Obama has gone public with what his basic headline is, as he did in his radio address over the weekend.

PRESIDENT BARACK OBAMA: If we're serious about reducing the deficit we have the combine spending cuts with revenue. And that means asking the wealthiest Americans to pay a little more in taxes.

WESSEL: So you're going to hear that, over and over again, from the president. This week, he's meeting with labor leaders and chief executives of big companies. He's holding a press conference on Wednesday. And he's invited the bipartisan congressional leadership to meet with him at the White House on Friday, before the president goes off for a few days in Thailand, Cambodia and Burma on a trip.

Meanwhile, all the outside groups are stepping up their public pressure. Some on the left are agitating to avoid the grand bargain because they don't want cuts in benefits. Some on the right are agitating to avoid a grand bargain because they don't want increase in taxes. And others, including some big company CEOs are kind of beginning to shout to the Congress and the President, my gosh, we can't go over the cliff.

This is the time to fix the deficit. They're going to be running ads and you're going to be hearing a lot from them, as well.

MONTAGNE: David, can you tell us in a few seconds what the chances are of this actually working?

WESSEL: Well, the betting on Wall Street is pretty simple. Sixty percent chance that they get a deal and don't go over the cliff, but don't fix the deficit. Twenty percent chance that they go over the cliff, and 20 percent chance for this big, big grand bargain that avoids the cliff and actually makes a dent in the deficit.

MONTAGNE: David, pleasure talking to you again.

WESSEL: You're welcome.

MONTAGNE: David Wessel, economics editor of The Wall Street Journal. Transcript provided by NPR, Copyright National Public Radio.